• Foreign investors continued their strong appetite for Malaysian bonds in August, with inflows reaching RM9.0b (July: RM7.8b), the highest since July 2023. This surge was largely driven by increased exposure to Malaysian Government Securities (MGS)
  
  − Total foreign debt holdings increased to RM 288.1b in August (July: 279.1b), lifting the foreign share of total outstanding to 13.9% (July: 13.5%).
  
  − Continued interest in local bonds was primarily driven by Fed Chair Powell’s signal of a potential September rate cut, turning the 10-year MGS-UST yield differential positive. Investor sentiment was further boosted by strong 2Q24 GDP growth (5.9%), a strengthening ringgit, and government efforts to attract AI investments and forge stronger trade ties with India and Japan. Malaysia’s ambitions to join BRICS also supported investor sentiment.

• The significant inflows were driven by robust demand for MGS and Government Investment Issues (GII), as well as increased investment in Malaysian Islamic Treasury Bills (MITB)
  
  − MGS (RM6.2b: Jul: RM5.1b): Inflows rose from the previous month, supported by favourable MGS-UST yield differential, lifting foreign MGS holdings to a nine-month high of 34.6% (Jul: 34.2%).
  
  − GII (RM0.8b; Jul: RM1.4b): Although inflows slowed from the previous month, foreign holdings share of GII continued to climb, reaching 9.5% (Jul: 9.3%).
  
  − MITB (RM0.7b; Jul: RM0.4b): Persisted to attract inflows, with its total foreign holdings share nearly doubling to 20.6% in August from 13.7% in July.

• Foreign investment in Malaysia’s equity market hit a 29-month high, with net inflows of RM2.5b (Jul: RM1.3b)
  
  − The robust performance of the ringgit, solid economic fundamentals, booming the data centres, and thegovernment’s policy reform efforts have spurred a surge in local stock investments, with the financial services sector emerging as the top draw for investors in August.

• Overall, the capital market recorded the highest net foreign inflows for this year (RM11.5b; July: RM9.1b)
   
• Domestic debt market set to benefit from Fed rate cuts, policy reforms and economic stability
  
  − As we have anticipated since late last year, investor interest in Malaysia’s local debt market is set to rise, buoyed by the prospect of Fed rate cuts and sustained domestic economic stability. With the Fed signalling potential rate reductions due to easing inflation and a softening US labour market, the positive yield gap between 10-year MGS- UST is likely to widen, enhancing the appeal of Malaysia’s higher-yielding, stable debt market.
  
  − BNM’s recent decision to hold the interest rate at 3.00%, coupled with strong GDP growth and contained inflation, further strengthens the country’s investment appeal. Based on our projection, this could drive the 10-year MGS yield down to around 3.56% by the end of the year. Additionally, expanding trade links with Russia and India, and Malaysia’s potential inclusion in BRICS, may drive further foreign capital inflows.

Source: Kenanga Research - 9 Sep 2024